Educational Articles

Using a Value Line Report: Wal-Mart - September 6, 2013

J. Susan Ferrara
| September 06, 2013

Discount chain Wal-Mart (WMT - Free Wal-Mart Stock Report) is undoubtedly regarded as the largest and most powerful company in the retail industry. And given its immense success, it is no surprise that the stock holds a leading position among its fellow Dow 30 components.

Wal-Mart got its start back in 1945, when Sam Walton opened a franchise variety store in Newport, Arkansas. By 1962, he launched Wal-Mart Discount City, modeled after FedMart, a Houston-based discount department store open only to government employees that would pay a membership fee for inexpensive, high-volume goods. He began expanding the chain in small towns, with the idea that lower-income consumers would be inclined to buy items in bulk at bargain prices. As the store count widened, Walton took steps to digitalize the business by upgrading its technological infrastructure, installing inventory-tracking systems and barcode scanners, among other things. This was certainly a major step for the frugal-minded founder of Wal-Mart, albeit a necessary one that helped to catapult the mega chain from its humble beginnings to the forefront of the modern retail world.

But the discount giant never lost sight of its low-cost strategy, which Walton so staunchly supported. Indeed, to Wal-Mart’s credit, a low-wage, low-benefit model has enabled it to keep costs down, while offering shoppers a plethora of branded products at inexpensive prices, essentially giving the retailer an edge over the competition. Additionally, Wal-Mart’s sizable scale has worked to its advantage, providing it with vast bargaining power with vendors. Besides offering the lowest possible prices and beating out rivals, the retail giant’s supercenter prototype, which combines the standard store format with a supermarket to provide a one-stop shop, has done a good job attracting customers and strengthening loyalty. During the economic downturn of 2007-2009, Wal-Mart’s pricing seemed to resonate even with shoppers of higher affordability levels, not just its core base of low-income households.

Admittedly, Wal-Mart’s success hasn’t come without controversy. Over the years, the retail heavyweight has seen its share of negative headlines, from putting small mom-and-pop stores out of business to gaining a poor reputation as a low-wage employer. It has faced backlash from numerous groups calling its ethics into question. While such publicity has likely kept some investors at bay, this blue chip still manages to be one of the most widely-held stocks. Looking at the Value Line report, it’s easy to see why.

A standout feature of the stock is its Safety rank of 1 (located at the top left-hand corner of the page in the Ranks box). The rank can range from 1 (Highest) to 5 (Lowest). Here, the measure implies WMT shares have considerably less risk, and thus, are much safer than the average issue under Value Line’s review, making it a top-notch selection for cautious individuals. Also in the same section, the Beta coefficient is pegged at 0.60, indicating that the issue’s volatility is well below that of the market (where 1.00 = the market). (Note that a figure lower than 1.00 means the equity is less volatile, while a number that is higher indicates greater volatility than the overall market.)

In a similar vein, the Ratings box in the lower right-hand corner shows other elements that give an investor much insight into the health of a company’s financial situation. Notably, the company gets an A++ grade for Financial Strength, which takes into account a range of balance sheet items, such as cash on hand and debt level. Just beneath that is the Stock’s Price Stability, which tells how stable the equity’s price is in general. WMT scores a perfect 100 for this, substantiated by the Price Chart. It should be mentioned that Financial Strength and Price Stability are two important factors that are used to determine the Safety rank.

The stock has other fairly attractive qualities, besides those already mentioned. Take the dividend yield, for example, found in the Top Label. Although not stellar at 2.4%, the expected return from cash distributions on the equity over the coming 12 months means there is some decent income to be made here. Note, too, the annual total return in the Projections box. While the projected 3- to 5-year range, which factors in the estimated price appreciation and prospective dividends to be paid over that time frame, may not seem extraordinary, it is actually quite good, on a risk-adjusted basis.

As a complete package, WMT shares make a fine choice for income-and-growth portfolios with a conservative bent. Analyst Kevin Downing sums it up in the Commentary by pointing out that “Wal-Mart’s history of cost cuts and store expansion gives us confidence in its solid risk-adjusted long-term price appreciation potential”, while the stock also “boasts top scores for Safety and Stock Price Stability”.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.